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Breaking: New SBA Loan Program Provides Business Relief

03/26/2020 Keith Carlson

Wednesday night, the US Senate voted (96-0), to advance “Phase Three” of a congressional response to the COVID-19 crisis. The legislation, entitled the “Coronavirus Aid, Relief, and Economic Security Act” (the CARES Act), follows days of bi-partisan wrangling.  The estimated impact is approximately $2 trillion, and includes funding for: a) extraordinary public health spending, b) immediate cash relief for individual citizens, c) broad lending program for small businesses, and d) directed financial aid for industries that have been severely impacted.

Because the lending program for small businesses is of most interest to VL clients, we want to summarize what we know.  We want to note that this program is entirely different than the COVID-19 disaster loans we discussed earlier this week.

Loan Program details include:

  • What is it: The CARES Act has amended the Small Business Act (SBA); the amendment has created the Paycheck Protection Program “program”; it will be closely associated with the existing 7a program that many are familiar with. The program increases the government guarantee of loans made to 100%.
  • Dates: The program will be open from February 15, 2020 to June 30, 2020.
  • How Much and What For: The program Provides federally-backed loans to eligible small businesses for purposes of paying operational costs like payroll, rent, health benefits, insurance premiums, utilities, etc.
    • The CARES act increased the maximum to $10 million from $5 million
    • The amount someone can borrow for purposes of this new program will be based on formula: 2.5x the monthly running average of your last twelve months payroll, including bonuses.
  • Debt Forgiveness: The loan program will have a debt forgiveness component.
    • Forgiveness equal to: a) the amount spent by the borrower during an 8-week period after the origination date of the loan on payroll costs, interest payment on any mortgage incurred prior to February 15, 2020, b) payment of rent on any lease in force prior to February 15, 2020, and c) payment on any utility for which service began before February 15, 2020.
    • Amounts forgiven may not exceed the principal amount of the loan.
    • Amount forgiven will be reduced proportionally by any reduction in employees compared to the prior year (there is fairly robust descriptions of this; contact us to learn more).
    • Borrowers which re-hire workers previously laid off will not be penalized for having a reduced payroll at the beginning of the period.
    • Borrowers will provide documentation to lenders of forgiveness eligible payments during the period.
    • Upon a lender’s report of an expected loan forgiveness amount for a loan or pool of loans, the SBA will purchase such amount of the loan from the lender.
    • Canceled indebtedness resulting from this section will not be included in the borrower’s taxable income.
  • Who Can Provide the Funding: The loans will be processed by banks that have SBA operations (contact us if you need to know who those banks are).
  • Eligibility:
    • Small business, nonprofit, or veteran’s organization with less than 500 employees, or the applicable size standard for the industry as provided by SBA, if higher;
    • Sole-proprietors, independent contractors, and other self-employed individuals.
    • Allow businesses with more than one physical location and employs no more than 500 employees per physical location in certain industries to be eligible.
    • Waives affiliation rules for businesses in the hospitality and restaurant industries, franchises who are approved on the SBA’s Franchise Directory, and small businesses who receive financing through the Small Business Investment Company (SBIC) program.
  • Certification: Requires eligible borrowers to make a good faith certification they have been impacted by COVID-19 and will use the funds to retain workers and maintain payroll and other debt obligations and sets out parameters for full-time equivalent employees.
    • Waives collateral and personal guarantee requirements under this program.
    • Waives both borrower and lender fees for participation in the program
  • Allows complete deferment of 7(a) loan payments for not more than one year (lender discretion).

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